06 January 2012
The European Banking Authority (EBA) has today published its Guidelines on AMA extensions and changes (EBA/GL/2012/1). The aim is to harmonise processes regarding the supervisory approval of such changes and to assist institutions using the Advanced Measurement Approach (AMA) to further develop their AMA models.
The Guidelines provide institutions with guidance on how to communicate AMA extensions and changes to the competent authorities and on how to define internal policies for AMA changes in line with supervisory expectations. The Guidelines do not contain requirements regarding the modelling or risk management of institutions.
Changes to the AMA have to be categorized according to their severity as significant, major or minor change. While extensions and significant changes require a prior approval, major and minor changes need to be notified to the competent authority. Supervisors will review the AMA change policies and ultimately approve or object to any proposed change or extension. The Annex to these Guidelines elaborates on the criteria for the classification of extensions and changes in the different categories. The EBA expects that the EU competent authorities perform all tasks to implement the Guidelines on AMA changes by 6 March 2012. After that date, members should ensure that institutions comply with them effectively.
The Advanced Measurement Approach (AMA)
Article 105 Par. 1 of Directive 2006/48/EC and Article 20 Par 1 of Directive 2006/49/EC allow institutions and investment firms (hereinafter, institution(s)) to use, within the Advanced Measurement Approach (AMA), their internal risk models to determine the regulatory capital charge for operational risk, provided these internal models are expressly approved by the competent Authorities.
An AMA, including the internal risk model, risk management and control policies and procedures should, at all times, be tailored to the specific characteristics of the institution, so that its actual operational risk profile is effectively covered. Both AMA extensions and changes may have a considerable impact on the quality and reliability of the AMA framework and on the level of regulatory capital for operational risk.